Tax reform is in the air. On Thursday, November 9, Senate Republicans released a Description of the Chairman’s Mark (prepared by the Joint Committee on Taxation (JCT)), which contains in substance the Senate version of proposed tax reform legislation. Among other things, that JCT description stated that the bill would clarify the treatment of many workers as independent contractors by providing a safe harbor that, if satisfied, would guarantee such treatment. But in the modification to the Chairman’s Mark released on November 14, that safe harbor provision was stricken from the Senate bill.

In a blog post on TaxProf Blog, we expressed concern about this worker classification clarification provision. In brief, our worry was that even though the legislation “clarifies” the treatment of workers as independent contractors and arguably simplifies some aspects of their tax compliance burdens, it also carries potentially important ramifications for broader fights over worker classification that are occurring in the labor and employment law area.

In this blog post, I will discuss how the IRS has been dealing with a growing sector of our economy called the “sharing” economy (also known as the gig economy). Proponents of the sharing economy believe it promotes marketplace efficiency by enabling individuals to generate revenue from assets while the assets are not being used personally. For example, a vacation home owner may rent out her home while she is not using it. Airbnb (short-term home rentals) and Uber (shared car services) are two of the more prominent companies that facilitate a sharing economy.

Nearly a quarter of the U.S. population earns money from the sharing economy. Although it may be growing at a healthy rate, I want to make clear that not all sharing economy participants are finding it to be a very lucrative endeavor. On the contrary, data show that the vast majority – 85 percent – earn less than $500 per month from their gigs.

Furthermore, many of the service providers are simply unfamiliar with the tax filing and recordkeeping requirements. Service providers in the sharing economy may not fit the mold of the traditional employee who works “9 to 5” and receives a Form W-2 from one employer. Rather, a service provider in the sharing economy may have to take on multiple gigs to help make ends meet, making it difficult to track and allocate expenses among the various gigs. The majority of them do not receive any tax information from the sharing economy platform they use to earn their income. This demonstrates both the need for guidance from the IRS and the opportunity to create a culture of tax compliance among participants in the sharing economy from the outset. Establishing the tax compliance norms for this emerging industry in its infancy will assist the IRS as this segment of taxpayers grows.

This leads us to the question, “What can the IRS do to help sharing economy participants comply with their tax obligations?” First, when looking at noncompliance, it is important to distinguish between the various types of noncompliance the IRS encounters. Not all noncompliant taxpayers are willfully noncompliant; many of them are tripped up by “unknowing” or “lazy” noncompliance. That is, some taxpayers are simply unaware of their tax compliance obligations. Many sharing-economy entrepreneurs and merchants have never operated a small business and need to understand certain basic tax obligations (i.e., making required quarterly estimated payments throughout the year to avoid penalties).

Wage growth in America has stagnated. Over the past eight years, the real median wage in the U.S. rose by an average of six-tenths of a percent per year. But even as Americans’ real wages stagnated, real corporate profits soared, increasing by an average of 11 percent per year. The relationship between corporate profits and worker compensation broke down in the late 1980s. Prior to 1990, worker wages rose by more than 1 percent for every 1 percent increase in corporate profits. From 1990-2016, the pass-through to workers was only 0.6 percent, and looking most recently, from 2008-2016, only 0.3 percent.1 The profits of U.S. multinationals are still American profits, but, increasingly, the benefits of those profits do not accrue to U.S. workers.

The deteriorating relationship between wages of American workers and U.S. corporate profits reflects the state of international tax competition. The problem is not unique to America; countries around the world have responded to the international flow of capital by cutting their corporate tax rates to attract capital back from other countries. They have doubled down on such policies as they have seen business-friendly policies benefit workers. This analysis from the Council of Economic Advisers reviews the evidence that has driven other developed countries to pursue the path of lower corporate tax rates and estimates how business tax reform in the Unified Framework for Fixing Our Broken Tax Code2 (hereafter, the “Unified Framework”) is expected to affect wages for American workers.

Reducing the statutory federal corporate tax rate from 35 to 20 percent would, the analysis below suggests, increase average household income in the United States by, very conservatively, $4,000 annually. The increases recur each year, and the estimated total value of corporate tax reform for the average U.S. household is therefore substantially higher than $4,000. Moreover, the broad range of results in the literature suggest that over a decade, this effect could be much larger.

Nina Olson, the National Taxpayer Advocate (as if you did not know), had a great blog last week describing a really cool study her office conducted on how to improve taxpayer compliance with the Earned Income Tax Credit (ETIC ... again, as if you did not know).

The basic idea was to see if a simple letter mailed to taxpayers who had demonstrated some identifiable error in their 2014 EITC claims would result in them making fewer errors in their 2015 EITC claims. Not only that, but the study compared that group to a control group of similar taxpayers who made similar errors but who were not sent a letter explaining where they went wrong.

Certainly, my intuition as a teacher is that when you give feedback on what students do wrong, they tend to do better. The study supports that intuition’s application to taxpayers: tell them what they were doing wrong and they will do better overall and will certainly do better than those who get no such feedback.

What struck me as particularly interesting and worth further comment was the feature of just how the Taxpayer Advocate Service sent the letter to the taxpayers. Nina gives this description:

Rising inequality and slow economic growth in many countries have focused attention on policies to support inclusive growth. While some inequality is inevitable in a market-based economic system, excessive inequality can erode social cohesion, lead to political polarization, and ultimately lower economic growth. This Fiscal Monitor discusses how fiscal policies can help achieve redistributive objectives. It focuses on three salient policy debates: tax rates at the top of the income distribution, the introduction of a universal basic income, and the role of public spending on education and health.

The International Monetary Fund delivered a blunt warning to international policy makers ahead of the fund’s annual meeting this week: Governments risk undermining global economic growth by cutting taxes on the wealthy.

The message, while aimed broadly at all developed nations, carries particular resonance in the United States as the Trump administration and Republican lawmakers push a tax plan that critics say will exacerbate income inequality by reducing taxes for the richest Americans. ...

This Second Report recommends actions to eliminate, and in other cases mitigate, consistent with law, the burdens imposed on taxpayers by eight regulations that the Department of the Treasury (Treasury) has identified for review under Executive Order 13789. As stated in the order, it is the policy of the President that tax regulations provide clarity and useful guidance. Recent regulations, however, have increased tax burdens and impeded economic growth. The order therefore calls for immediate action to reduce tax regulatory burdens and provide useful and simplified tax guidance.

In May 2013, the Treasury Inspector General for Tax Administration (TIGTA) published an audit report in which we reported that between May 2010 and May 2012, the Internal Revenue Service (IRS) used inappropriate criteria to identify for review organizations’ applications for tax-exempt status. TIGTA’s 2013 audit found that the IRS inappropriately selected organizations for scrutiny based on their names or policy positions, instead of indications of significant potential political campaign intervention. Further, TIGTA found that the IRS made requests for unnecessary information and delayed, in some cases for years, making decisions on the organizations’ applications.

This audit was initiated based on bipartisan interest expressed by Members of Congress regarding the IRS’s use of other criteria to select tax-exempt applications for further review. Today, we are releasing a 115-page audit report that provides a historical account of the IRS’s use of 17 additional selection criteria going back as far as 2004. These 17 selection criteria were chosen based on bipartisan input from congressional committees of jurisdiction over the IRS, input from the IRS, and training materials that were not provided to TIGTA during the 2013 audit.

TIGTA found that, between 2004 and 2013, the IRS potentially used more than 250 criteria to identify for further review the applications of organizations seeking tax-exempt status. In our 2013 audit, we found that the process for review of applications for potential political advocacy from May 2010 to May 2012 involved the IRS’s use of a tracking sheet identifying the potential political cases selected for further review; however, the IRS was unable to identify what specific cases, if any, were selected for further review under 16 of the 17 criteria in our current report. Without case selection tracking sheets for the 16 criteria, TIGTA used various other sources to identify 146 cases related to the 17 criteria with indications of political activity, and confirmed that 83 of them were selected for review based on the 17 criteria.

This report is divided into 17 sections, one for each of the 17 criteria. Due to the unique nature of the 17 criteria, it is difficult to compare the criteria to each other, or to compare in aggregate to the criteria reviewed in the 2013 audit. However, TIGTA did find that, while the number of organizations impacted is significantly less than the number detailed in the 2013 report, some organizations in the current report also experienced significant delays and received requests for unnecessary information. In addition, in the 2013 report the majority of cases we reviewed were from organizations applying for I.R.C. § 501 (c)(4) status. In contrast, the majority of the 146 cases in the current report were organizations applying for I.R.C. § 501 (c)(3) status.

Our 2013 report made several recommendations for process improvements and all of them were implemented by the IRS, which we verified in a follow-up audit in 2015. As a result of our 2013 report, the IRS completely revamped the process for reviewing tax-exempt applications, including the elimination of criteria listings, known as “Be On the Lookout” listings, in June 2013. According to the IRS, the revamped process has totally eliminated the backlog of applications and reduced processing cycle times for cases. Since the review process in place when the 17 criteria were potentially used by the IRS is no longer in effect, TIGTA did not make any recommendations for improvement in this audit report.

IMPACT ON TAXPAYERS In a prior audit, TIGTA determined that the IRS used inappropriate criteria to select tax‑exempt applications for further review. Moreover, ineffective management resulted in substantial delays in processing certain applications and allowed unnecessary information requests to be issued. It is critical that tax laws are administered in a fair and impartial manner.

WHY TIGTA DID THE AUDIT In the prior review, TIGTA audited criteria that the IRS stated it used to select potential political cases for additional review from May 2010 through May 2012. The overall objective of this audit was to provide a historical account of the IRS’s development and use of 17 select criteria from 259 criteria used to identify tax‑exempt applications for review. The 17 criteria discussed in this report were selected based on input from staff of various congressional committees of jurisdiction and the IRS as well as from training documents that were not provided to TIGTA in the prior audit.

WHAT TIGTA FOUND TIGTA found that, from August 2004 through June 2013, the IRS potentially used 259 criteria to identify tax-exempt applications for further review. Most of these criteria involved issues besides political campaign intervention, such as potential fraud, abuse, and links to terrorism.

In the prior audit, TIGTA found that the IRS used a tracking sheet to show which potential political cases were selected for further review; however, IRS management stated that case listings such as the one provided in the prior audit were not required. Due to the lack of case listings for all but one of the 17 criteria, TIGTA used various sources to identify more than 900 cases that could potentially have been selected for review based on the 17 criteria. However, TIGTA could not verify whether all relevant cases were identified.

Based on TIGTA’s review of case documentation, 181 of the more than 900 cases had evidence of political activities or indications of significant potential political campaign intervention (the subject of the prior audit). Thirty-five of these cases were not processed while the applicable criteria were in use and did not appear to be processed based on the criteria. For the remaining 146 cases, TIGTA determined that 83 were processed based upon the criteria and 63 were processed while the criteria were in use, but TIGTA could not confirm these 63 cases were selected based upon the criteria. Analysis of the 146 cases is shown in each of the 17 sections of the report with information for each of these unique criteria.

TIGTA’s review of the almost 4.5 million tax returns prepared by grantees during Grant Years 2014 through 2016 identified that: 1) volunteers prepared 201,572 (4 percent) returns with an Adjusted Gross Income amount that exceeded the income threshold set for free tax return preparation, including 34,371 returns with an Adjusted Gross Income greater than $100,000 and 11 returns with an Adjusted Gross Income exceeding $1 million; 2) the IRS could not verify if 456,220 (10 percent) tax returns with complex tax schedules were prepared by volunteers with advanced certifications; and 3) 15,402 returns were out of scope. Finally, some guidelines and procedures were not current or consistent.

This paper investigates the factors that shape governments’ capacity to collect revenue. To do so, it analyses how tax revenue responds to tax rates using evidence from a panel of 34 OECD countries over 1978-2014. The estimations show that the response of revenue to rates weakens as rates become higher, confirming the existence of a hump-shaped relationship between tax revenue and rates for corporate income taxation and providing a new contribution by analysing value-added taxation. Importantly, the estimated responses of revenue to tax rates vary, in some cases very strongly from an economic perspective, depending on country-specific policies and framework conditions. In particular, the corporate income tax revenue-generating potential of hiking the effective rate shrinks much more quickly in more open economies than in more closed ones.

The overall objective of this review was to determine the efficiency and effectiveness of key ongoing or planned activities aimed at addressing the IRS operational challenge of replacing its aged hardware infrastructure.

While the Sustaining Infrastructure Program spends on average nearly 99.7 percent of its allocated budget each year, the IRS has not yet achieved its stated objective of reducing its aged information technology hardware to an acceptable level of 20 to 25 percent. In fact, this percentage has steadily increased from 40 percent at the start of Fiscal Year 2013 to 64 percent at the start of Fiscal Year 2017. The IRS estimates that the current replacement cost for its aged information technology hardware is approximately $430 million.

Readers will recall that Congress, in §32102 of the 2015 (FAST) Act, amended IRC §6306 to force the Service to outsource some collection inventory to private collection agencies.

Now, I have no doubt that readers of this blog are totally compliant in their taxes. And if any happen to be delinquent in their taxes, I have no doubt they are not in the category of delinquent taxpayers who face collection from private collection agencies. But I also suspect many readers have received questions about the program from clients, friends, family members, workplace colleagues, neighbors, and others.

The National Taxpayer Advocate Nina Olsen has a blog post here that is well worth your time to read. It's about the Service's automated levy program called FPLP (Federal Levy Payment Program).

One way the Service tries to collect unpaid taxes is by looking for people who owe the delinquent taxpayer money and snagging those payments. That's called a levy. FPLP is a computer program designed to snags payments owed by the federal government to delinquent taxpayers. Now, some people consider it an irony that one hand of the federal government actually sends payments to many delinquent taxpayers who owe the federal government money. Notably, however, FPLP hits what are commonly viewed as "safety net" payments from Social Security and Federal Retirement programs. So other people consider it an irony that one hand of the federal government would partially undo the safety net payments made by the other hand.

From January 1, 2015, through March 31, 2016, the IRS hired nearly 7,500 employees, of which more than 2,000 had been previously employed by the IRS. ... The IRS has not effectively updated or implemented hiring policies to fully consider past IRS conduct and performance issues prior to making a tentative decision to hire former employees, including those who were terminated or separated during an investigation of a substantiated conduct or performance issue.

While most employees who are rehired do not have prior conduct or performance issues, TIGTA found that more than 200 (approximately 10 percent) of the more than 2,000 former employees who were rehired between January 2015 and March 2016 were previously terminated from the IRS or separated while under investigation for a substantiated conduct or performance issue.

IRS and no one else in the federal government really has an idea of what's going on," said Daniel Garcia-Diaz, an auditor with the Government Accountability Office while testifying before the U.S. Senate Committee on Finance. "These are basic accountability requirements we would expect of any program, especially one as important as this one."

On June 24, 2016, House Speaker Paul Ryan released the Better Way Tax Reform Task Force Blueprint, which provides a revision of federal income taxes. For the individual income tax, the plan would broaden the base, lower the rates (with a top rate of 33%), and alter some of the elements related to family size and structure by eliminating personal exemptions, allowing a larger standard deduction, and adding a dependent credit. For business income, the current income tax would be replaced by a cash-flow tax rebated on exports and imposed on imports, with a top rate of 20% for corporations and 25% for individuals. The cash-flow tax would be border-adjusted (imports taxed and exports excluded), making domestic consumption the tax base. The system would also move to a territorial tax in which foreign source income (except for easily abused income) would not be taxed. In addition, the proposal would repeal estate and gift taxes. Although the Affordable Care Act (ACA) taxes are not repealed in the Better Way tax reform proposal, ACA taxes are repealed in the Healthcare Task Force proposals.

The Currency and Foreign Transactions Reporting Act of 1970, referred to as the Bank Secrecy Act, requires U.S. financial institutions to file reports of currency transactions exceeding $10,000. ... In October 2014, a new policy was instituted by IRS Criminal Investigation (CI) that it would no longer pursue the seizure and forfeiture of funds related to legal source structuring. In the same month the policy changed, the New York Times reported that CI had been seizing funds in structuring investigations without filing a criminal complaint. Property owners were left to prove their innocence, and many gave up trying. This audit was initiated to evaluate the IRS’s use of seizures against property owners suspected of structuring transactions to avoid Bank Secrecy Act reporting requirements.

Most of the seizures for structuring violations involved legal source funds from businesses. While current law does not require that the funds have an illegal source (e.g., money laundering or criminal activity other than alleged.

The IRS pursued hundreds of cases from 2012 to 2015 on suspicion of structuring, but with no indications of connections to any criminal activity. Simply depositing cash in sums of less than $10,000 was all that it took to arouse agents' suspicions, leading to the eventual seizure and forfeiture of millions of dollars in cash from people not otherwise suspected of criminal activity.

Tax expenditure analysis can help both policymakers and the public to understand the actual size of government, the uses to which government resources are put, and the tax and economic policy consequences that follow from the implicit or explicit choices made in fashioning legislation. This report on tax expenditures for fiscal years 2016-2020 is prepared by the staff of the Joint Committee on Taxation (“Joint Committee staff”) for the House Committee on Ways and Means and the Senate Committee on Finance. The report also is submitted to the House and Senate Committees on the Budget.

As in the case of earlier reports, the estimates of tax expenditures in this report were prepared in consultation with the staff of the Office of Tax Analysis in the Department of the Treasury (“the Treasury”). The Treasury published its estimates of tax expenditures for fiscal years 2015-2025 in the Administration's budgetary statement of February 9, 2016. The lists of tax expenditures in this Joint Committee staff report and the Administration's budgetary statement overlap considerably; the differences are discussed in Part I of this report under the heading “Comparisons with Treasury.”

This paper examines various factors that affect estimates made by the Congressional Budget Office and the staff of the Joint Committee on Taxation of the budgetary savings from tax compliance proposals. Affecting the current law baseline, against which proposed changes are measured, are the size of the tax gap and the amount of Internal Revenue Service (IRS) resources. Other considerations that affect the revenue estimates for either appropriation proposals or changes to the tax code include the distinction between detection and deterrence, the budget scorekeeping guidelines, and the constraints faced by the IRS when trying to obtain a higher return on investment from new initiatives than from the activities allowed under current law. In addition to those common considerations, there are factors unique to proposals to increase funding and to those that would expand the IRS’s enforcement tools allowed under the tax code. Those unique factors are illustrated by two examples—first, the Administration’s proposal to increase funding for IRS enforcement actions that was included in its fiscal year 2016 budget submission and second, legislation enacted in 2016 to reduce identity fraud in the tax system.

A surprising number of IRS employees are sending unencrypted emails containing personal taxpayer information to private accounts, putting that information at risk of being stolen, the agency’s inspector general said Thursday.

One of the big criticisms of the current economic expansion—and also the one that ran from 2001 through 2007—is that most of the gains accrued to the best off, unleashing a populist groundswell in the presidential election campaign.

The upshot is these changes in tax and health-care policy will increase the share of after-tax income by the poorest fifth of households by 0.6 percentage point while reducing the share of the wealthiest 1% of households by 1.2 percentage points.

Taken together, the administration says that it has done more to redistribute wealth to the bottom 99% of families through tax-code changes than any administration since at least 1960. The share of after-tax income from the poorest fifth of households fell by nearly 25% from 1979 to 2007, and the White House says its tax and health-care changes have reversed one-third of that decline.

Median household income was $56,516 in 2015, an increase in real terms of 5.2 percent from the 2014 median of $53,718 (Figure 1 and Table 1). This is the first annual increase in median household income since 2007, the year before the most recent recession.

The Internal Revenue Service (IRS) uses a variety of documents to communicate its interpretation of tax laws to the public, but only considers Internal Revenue Bulletin (IRB) guidance to be authoritative. IRS information published outside of the IRB can help taxpayers understand tax laws and make informed decisions, but does not always include information clarifying the limitations of its use. IRS has detailed procedures for identifying, prioritizing, and issuing new guidance. However, it lacks procedures for documenting the decision about what type of guidance to issue.

During Fiscal Year 2014, more than 4,100 full-time, permanent employees separated from the IRS, including 186 who separated during a pending disciplinary case (including criminal misconduct). It is important for the IRS to recover security items, such as Government identification, to prevent former employees from unauthorized entry to IRS facilities and workspaces, accessing IRS computers and taxpayer information, or potentially misrepresenting themselves to taxpayers. ...

Based on a random sample of Fiscal Year 2014 employee separations, TIGTA estimates that the IRS could not verify that all security items were recovered for more than 2,700 (66 percent) of the more than 4,100 employee separations. TIGTA also reviewed a judgmental sample of 10 employees who separated during a pending disciplinary case. The IRS could not verify the recovery of the security items for six of these employees and could not provide evidence that these cases were referred to the TIGTA Office of Investigations as required. When the IRS did not collect security items, some were later used to enter IRS buildings.

The Earned Income Tax Credit (EITC), the Additional Child Tax Credit (ACTC), and the American Opportunity Tax Credit (AOTC) provide tax benefits to millions of taxpayers—many of whom are low-income—who are working, raising children, or pursuing higher education. These credits are refundable in that, in addition to offsetting tax liability, any excess credit over the tax liability is refunded to the taxpayer. In 2013, the most recent year available, taxpayers claimed $68.1 billion of the EITC, $55.1 billion of the CTC/ACTC, and $17.8 billion of the AOTC.

Eligibility rules for refundable tax credits (RTCs) contribute to compliance burden for taxpayers and administrative costs for the Internal Revenue Service (IRS). These rules are often complex because they must address complicated family relationships and residency arrangements to determine who is a qualifying child. Compliance with the rules is also difficult for IRS to verify due to the lack of available third party data. The relatively high overclaim error rates for these credits (as shown below) are a result, in part, of this complexity. The average dollar amounts overclaimed per year for 2009 to 2011, the most recent years available, are $18.1 billion for the EITC, $6.4 billion for the CTC/ACTC, and $5.0 billion for the AOTC.

In 2013, according to the Congressional Budget Office’s estimates, average household market income— a comprehensive income measure that consists of labor income, business income, capital income (including capital gains), and retirement income—was approximately $86,000. Government transfers, which include benefits from programs such as Social Security, Medicare, and unemployment insurance, averaged approximately $14,000 per household. The sum of those two amounts, which equals before-tax income, was about $100,000, on average. In this report, CBO analyzed the distribution of four types of federal taxes: individual income taxes, payroll (or social insurance) taxes, corporate income taxes, and excise taxes. Taken together, those taxes amounted to about $20,000 per household, on average, in 2013.1 Thus, average after-tax income—which equals market income plus government transfers minus federal taxes— was about $80,000, and the average federal tax rate (federal taxes divided by before-tax income) was about 20 percent.

Federal legacy IT investments are becoming increasingly obsolete: many use outdated software languages and hardware parts that are unsupported. Agencies reported using several systems that have components that are, in some cases, at least 50 years old. For example, ... the Department of the Treasury uses assembly language code—a computer language initially used in the 1950s and typically tied to the hardware for which it was developed. ... The following table provides examples of legacy systems across the federal government that agencies report are 30 years or older and use obsolete software or hardware, and identifies those that do not have specific plans with time frames to modernize or replace these investments.

The Treasury Inspector General for Tax Administration (TIGTA) today publicly released its audit report of the Internal Revenue Service’s (IRS) methods of addressing taxpayers who take business tax deductions for activities not engaged in for profit. TIGTA found that the IRS can improve its methods for identifying high-income taxpayers who may be offsetting their income with “hobby losses” from unprofitable business activity.

The tax code allows taxpayers to deduct all ordinary and necessary expenses paid or incurred in carrying on a trade or business. However, in the “hobby loss” provision in the tax code, the IRS generally disallows business tax deductions for activities not engaged in for profit.

President Obama’s unilateral pen-and-phone approach to governing has been aided by a decades-old secret memo that allows him to avoid economic scrutiny of some of the most intrusive rules and regulations his administration has issued, a top senator said Thursday.

Now Sen. Orrin G. Hatch, Utah Republican and chairman of the Finance Committee, has demanded Treasury Secretary Jacob Lew release the 1983 memorandum of understanding and defend the Reagan-era policy that has let Mr. Obama pursue changes on everything from corporate taxes to Obamacare without first giving a full heads-up to Congress.

Section 6103(p)(3)(C) of the Internal Revenue Code provides that the Secretary of the Treasury shall, within 90 days after the close of each calendar year, furnish to the Joint Committee on Taxation for disclosure to the public a report which provides, with respect to each Federal agency and certain other entities, the number of: (1) requests for disclosure of returns and return information (as such terms are defined in section 6103(b)); (2) instances in which returns and return information were disclosed pursuant to such requests or otherwise; and (3) taxpayers whose returns, or return information with respect to whom, were disclosed pursuant to such requests. In addition, the report must describe the general purposes for which such requests were made

In March 2016 GAO reported that the Internal Revenue Service (IRS) had instituted numerous controls over key financial and tax processing systems; however, it had not always effectively implemented safeguards intended to properly restrict access to systems and information. In particular, while IRS had improved some of its access controls, weaknesses remained with identifying and authenticating users, authorizing users' level of rights and privileges, encrypting sensitive data, auditing and monitoring network activity, and physically securing its computing resources. These weaknesses were due in part to IRS's inconsistent implementation of its agency-wide security program, including not fully implementing GAO recommendations. The table below shows the status of prior and new GAO recommendations as of the end of its fiscal year (FY) 2015 audit of IRS's information security. GAO concluded that these weaknesses collectively constituted a significant deficiency for the purposes of financial reporting for fiscal year 2015. Until they are effectively mitigated, taxpayer and financial data will continue to be exposed to unnecessary risk.

In each year from 2006 to 2012, at least two-thirds of all active corporations had no federal income tax liability. Larger corporations were more likely to owe tax. Among large corporations (generally those with at least $10 million in assets) less than half—42.3 percent—paid no federal income tax in 2012. Of those large corporations whose financial statements reported a profit, 19.5 percent paid no federal income tax that year. Reasons why even profitable corporations may have paid no federal tax in a given year include the use of tax deductions for losses carried forward from prior years and tax incentives, such as depreciation allowances that are more generous in the federal tax code than those allowed for financial accounting purposes. Corporations that did have a federal corporate income tax liability for tax year 2012 owed $267.5 billion.

The Internal Revenue Service (IRS) made progress in implementing information security controls; however, weaknesses in the controls limited their effectiveness in protecting the confidentiality, integrity, and availability of financial and sensitive taxpayer data. During fiscal year 2015, IRS continued to devote attention to securing its information systems that process sensitive taxpayer and financial information. Key among its actions were further restricting access privileges on key financial applications and continuing its migration to multifactor authentication across the agency. However, significant control deficiencies remained. For example, the agency had not always (1) implemented controls for identifying and authenticating users, such as applying proper password settings; (2) appropriately restricted access to servers; (3) ensured that sensitive user authentication data were encrypted; (4) audited and monitored systems to ensure compliance with agency policies; and (5) ensured access to restricted areas was appropriate. In addition, unpatched and outdated software exposed IRS to known vulnerabilities.

Rep. Devin Nunes (R-CA), a member of the Ways and Means Committee, will testify in support of his bill, H.R. 4377, the American Business Competitiveness (ABC) Act of 2015. This proposal would tax a business based on its actual cash-flow instead of its income.

Rep. Michael Burgess (R-TX) will discuss the merits of his bill, H.R. 1040, the Flat Tax Act. This proposal gives businesses and individuals the choice to opt-in to a 17% flat tax and to be taxed on a cash-flow basis for business activities.

Rep. Robert Woodall (R-GA) will speak in support of his bill, H.R. 25, the FairTax Act of 2015. This proposal would repeal all federal income, payroll and withholding, and estate and gift taxes. The taxes would be replaced with a national sales tax on gross payments of taxable property or services.

We analyze the profit shifting behavior of U.S. multinational firms using a unique panel data set of U.S. tax returns over the period 2002-2012. Prior research has found significant effects of tax rates in affiliate and parent countries on the profit shifting behavior of multinational entities, with semi-elasticities ranging from close to zero to well above one. We build on this prior work by allowing more heterogeneity in response across the distribution of tax rates and by including affiliates located in tax havens around the world. Our findings suggest that elasticities based on a log-linear specification may severely understate the sensitivity of profits to tax in low-tax jurisdictions while simultaneously overstating this elasticity in high-tax jurisdictions. Accounting for this type of nonlinearity appears crucial in considering how the global allocation of firm profits might change in response to tax rate changes.

The Internal Revenue Service (IRS) provided the lowest level of telephone service during fiscal year 2015 compared to prior years, with only 38 percent of callers who wanted to speak with an IRS assistor able to reach one. This lower level of service occurred despite lower demand from callers seeking live assistance, which has fallen by 6 percent since 2010 to about 51 million callers in 2015. Over the same period, average wait times have almost tripled to over 30 minutes. IRS also struggled to answer correspondence in a timely manner and assistors increasingly either failed to send required correspondence to taxpayers or included inaccurate information in correspondence sent. IRS has taken steps to remind assistors to send correspondence, but does not have adequate controls to ensure that they send accurate correspondence before closing cases. GAO also found that the Department of the Treasury (Treasury) does not include correspondence performance goals in its performance plan, and therefore, does not have a complete set of measures to assess performance. The decline in service has coincided with a 10 percent reduction in IRS's annual appropriations, as well as resource allocation decisions by IRS to meet statutory responsibilities, such as implementing tax law changes and supporting information technology infrastructure.

Tax expenditure analysis can help both policymakers and the public to understand the actual size of government, the uses to which government resources are put, and the tax and economic policy consequences that follow from the implicit or explicit choices made in fashioning legislation. This report on tax expenditures for fiscal years 2015-2019 is prepared by the staff of the Joint Committee on Taxation (“Joint Committee staff”) for the House Committee on Ways and Means and the Senate Committee on Finance. The report also is submitted to the House and Senate Committees on the Budget.

As in the case of earlier reports, the estimates of tax expenditures in this report were prepared in consultation with the staff of the Office of Tax Analysis in the Department of the Treasury (“the Treasury”). The Treasury published its estimates of tax expenditures for fiscal years 2014-2024 in the Administration's budgetary statement of February 2, 2015. The lists of tax expenditures in this Joint Committee staff report and the Administration's budgetary statement overlap considerably; the differences are discussed in Part I of this report under the heading “Comparisons with Treasury.”

The Internal Revenue Service (IRS) Whistleblower Office (WO) is responsible for processing thousands of tax whistleblower claims annually for two related whistleblower programs: for claims of $2 million or less, the 7623(a) program, and for claims over $2 million, the 7623(b) program. The whistleblower claim review process takes several years to complete, and GAO found that the WO is not using available capabilities to track and monitor key dates in its claim management system. Without available information on key dates related to award review and payments, the WO is unable to assess its performance against timeliness targets and risks unnecessarily delaying award payments.

Given the IRS’s goal of providing higher audit coverage to high-income taxpayers and its reduced operating budget, it is that much more important that the IRS selects audits that have the highest compliance impact. However, it is not clear that the IRS audits the most productive high-income taxpayer cases or that it has a clear rationale for the inventory balance it has established among taxpayers at different TPI levels.

We conducted an analysis on Fiscal Year 2014 audit closures of high-income taxpayers comparing the number of audits to the number of tax returns filed in Calendar Year 2013 to evaluate the IRS’s audit coverage and audit productivity in the various TPI ranges. Figure 5 shows that the IRS is providing increased audit coverage as a percentage of each TPI range as the high-income taxpayers’ TPIs increase.

In GAO’s opinion, the Internal Revenue Service’s (IRS) fiscal years 2015 and 2014 financial statements are fairly presented in all material respects. However, in GAO’s opinion, IRS did not maintain effective internal control over financial reporting as of September 30, 2015, because of a continuing material weakness in internal control over unpaid tax assessments. GAO’s tests of IRS’s compliance with selected provisions of applicable laws, regulations, contracts, and grant agreements detected no reportable instances of noncompliance in fiscal year 2015.

The material weakness in internal control over unpaid tax assessments was primarily caused by financial system limitations and errors in taxpayer accounts that rendered IRS’s systems unable to readily distinguish between taxes receivable, compliance assessments, and write-offs in order to properly classify these components for financial reporting purposes. These deficiencies necessitated the use of a compensating estimation process to determine the amount of taxes receivable, the most material asset on IRS’s balance sheet. Through this compensating process, IRS made over $9 billion in adjustments to the 2015 fiscal year-end gross taxes receivable balance produced by its financial systems. To address this material weakness, in fiscal year 2015, IRS took a significant step in developing a long-term corrective action plan. However, the plan does not include milestones or related dates for most of the actions, so it is unclear when IRS will fully address the issues that cause significant inaccuracies in the unpaid tax assessments information maintained in its accounting systems.

TIGTA is required to conduct periodic audits to determine whether the IRS properly denied written requests for taxpayer information pursuant to FOIA § 552(b)(7) and I.R.C. § 6103. The overall objectives of this audit were to determine whether the IRS improperly withheld information requested by taxpayers in writing, based on FOIA exemption (b)(3), in conjunction with I.R.C. § 6103, and/or FOIA exemption (b)(7) or by replying that responsive records were not available. Specifically, this included determining whether the IRS had adequate and effective policies and procedures to ensure that all of these requests were processed timely and that information was not improperly withheld. In addition, TIGTA determined whether IRS disclosure officers erroneously disclosed sensitive taxpayer information when responding to written FOIA, Privacy Act, or I.R.C. § 6103 information requests.

The Affordable Care Act created the refundable Premium Tax Credit (PTC) to assist eligible taxpayers with paying their health insurance premiums. Individuals may elect to have the PTC paid directly to their health insurance provider as partial payment for their monthly premiums (referred to as the Advance Premium Tax Credit (APTC)) or receive the PTC as a lump sum credit on their annual Federal income tax return. According to the IRS, almost $11 billion in APTCs was paid to insurers in Fiscal Year 2014.

The Consolidated and Further Continuing Appropriations Act of 2015 requires a report no later than June 1, 2015, on the IRS’s reconciliation of APTCs paid to taxpayers and the Department of Health and Human Services use of IRS information to reduce fraud and overpayments. The objective of this review was to provide selected information related to the processing of PTC claims during the 2015 Filing Season. TIGTA plans to issue the final results of its analysis later in Calendar Year 2015.

This report provides an overview of the federal tax treatment of same-sex married couples, with a focus on the federal income tax. Estate tax issues are also discussed. The administration of federal tax laws for married same-sex couples changed as a result of the U.S. Supreme Court ruling in United States v. Windsor in 2013, striking down Section 3 of the Defense of Marriage Act. The administration of federal tax laws was not affected by the June 26, 2015, ruling in Obergefell v. Hodges. Obergefell struck down state bans on same-sex marriage, holding that all states must both permit same-sex couples to marry in their states and recognize same-sex marriages that were formed in other states. While it did not change the administration of federal income tax laws, the Obergefell decision may affect the number of same-sex couples who decide to marry (and hence the number of federal and state tax returns filed by married couples). Analysis of changes to individuals’ state tax liabilities resulting from the Obergefell decision is beyond the scope of this report; however, state tax changes may ultimately affect federal tax liabilities for those couples who itemize deductions on their federal returns.

A bipartisan U.S. Senate bill that would revive and extend dozens of lapsed tax breaks would spur economic growth and cover about 11 percent of its own costs, according to Congress’s nonpartisan scorekeeper.

The analysis released Tuesday is an early test of Republicans’ focus on what’s known as dynamic scoring. It refers to the principle that legislation can be significant enough to change the size of the economy and affect the U.S. budget.

Republicans say that’s a more accurate way to study bills, and they’ve changed budget rules to include the analyses. Democrats are dubious, citing the uncertainty of projections.

The investigation determined that there were six possible sources to examine in order to potentially recover the missing e-mails. These sources were LERNER's crashed hard drive, the backup or disaster recovery tapes, a decommissioned Microsoft (MS) Exchange 2003 e-mail server, the backup tapes for the decommissioned e-mail server, LERNER's BlackBerry, and loaner laptop computers that may have been assigned to her while her laptop was being repaired. An examination of four of these sources, the backup or disaster recovery tapes, the decommissioned Exchange 2003 e-mail server, LERNER's BlackBerry, and the loaner laptops produced e-mail that the IRS had not previously produced to Congress, DOJ or TIGTA. The investigation also determined that once it was discovered that there was a gap in the IRS' production of LERNER's e-mail, the IRS did not fully identify as a source or perform recovery attempts for e-mail on the following electronic media, all of which the IRS had in their possession: backup or disaster recovery tapes, the decommissioned Exchange 2003 e-mail server, the backup tapes for the decommissioned e-mail server or the loaner laptop computers. ...

The investigation also revealed that on or about March 4, 2014, one month after the IRS realized it was missing some of LERNER's e-mails, IRS employees in the IRS Enterprise Computing Center in Martinsburg, West Virginia (Martinsburg), magnetically erased 422 backup tapes that are believed to have contained LERNER's e-mails that were responsive to Congressional demands and subpoenas. However, the investigation did not uncover evidence that the IRS and its employees purposely erased the tapes in order to conceal responsive e-mails from the Congress, the DOJ and TIGTA.

The investigation revealed that the backup tapes were destroyed as a result of IRS management failing to ensure that a May 22, 2013, e-mail directive from the IRS Chief Technology Officer (CTO) concerning the preservation of electronic e-mail media was fully understood and followed by all of the IRS employees responsible for handling and disposing of e-mail bStephen MANNING, former IRS Deputy Chief Information Officer, Strategy and Modernization.ackup media. ...

When interviewed, [Terence MILHOLLAND, IRS Chief Technology Office] was asked if he knew that e-mail backup tapes from a decommissioned e-mail server had been degaussed in March 2014, MILHOLLAND stated that he was not aware of this, and he advised that he was "blown away" at the revelation. He further stated that IRS IT senior management was ultimately responsible. MILHOLLAND also stated that his May 2013 e-mail directive would have applied to preserving the NCFB backup tapes and that the organization that sent them to be destroyed would also be responsible for their destruction.

Beginning with Fiscal Year (FY) 2012, Federal law has prohibited the IRS from using appropriated funds to enter into a contract with a corporation that has certain Federal tax debt and/or felony convictions. ...

The IRS did not have effective controls in place to prevent the award of contracts to corporations with certain Federal tax debt and/or felony convictions. TIGTA identified 17 corporations that were awarded a total of 57 contracts valued at about $18.8 million (including nearly $18 million for contract modifications)during FYs 2012 and 2013, while they had Federal tax debt. The IRS has not established a definition of Federal tax debt for this purpose and does not perform proactive tax checks to comply with this Federal law.

[T]he report showed that ACS collections were $3.2 billion in 2010, when there were 2,817 ACS workers, and $3.1 billion in 2014, when there were 2,234 ACS workers. The report admitted that's "slightly less" in collections after a more than 20 percent cut to the workforce. While collections fell to $2.8 billion in 2012, collections have actually been rising since then, and have been nearly flat over the entire period, even as the number of workers have fallen.

The Patient Protection and Affordable Care Act created a refundable tax credit, referred to as the Premium Tax Credit (PTC), to assist individuals with the cost of their health insurance premiums. Individuals may elect to receive the PTC in advance as partial payment for their monthly premiums (referred to as the Advance Premium Tax Credit (APTC)) or receive the PTC as a lump sum credit on their annual Federal income tax return. Beginning in January 2015, individuals are required to reconcile the APTC and can claim additional PTC on their annual tax return beginning with Tax Year 2014. ...

The overall objective of this review was to assess the status of the IRS’s preparations for verifying the accuracy of PTC claims during the 2015 Filing Season. ...

In response to the delays in receiving required Exchange Periodic Data submissions, the IRS developed contingency plans in an effort to improve its ability to ensure the accuracy of PTC claims. However, without the required enrollment data from the Exchanges, the IRS will be unable to ensure that all taxpayers claiming the PTC bought insurance through an Exchange as required.

Section 6103(p)(3)(C) provides that the Secretary of the Treasury shall, within 90 days after the close of each calendar year, furnish to the Joint Committee on Taxation for disclosure to the public a report which provides, with respect to each Federal agency and certain other entities, the number of: (1) requests for disclosure of returns and return information (as such terms are defined in § 6103(b)); (2) instances in which returns and return information were disclosed pursuant to such requests or otherwise; and (3) taxpayers whose returns, or return information with respect to whom, were disclosed pursuant to such requests. In addition, the report must describe the general purposes for which such requests were made.

Pursuant to § 6103(p)(3)(C), the IRS prepared a disclosure report for public inspection covering calendar year 2014. ... This document sets forth the report of the IRS, verbatim.